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Posts tagged with incentives

Summary: skip to the pictures after the <big> text under heading 2.

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Since 2009, pundits have concerned themselves with economic inequality. Robert Reich’s infographic about the US I’ll treat as a summary.

Let me dummyise the opinionscape into three camps:

  1. John Galt. The etymology of aristo-cracy is “rule by the best people”. The market rewards output fairly. Tax the best people and you will drive them out of France and into perfect stateless seasteads. Lose them and you’ll be sorry.
  2. Maximilien de Robespierre. F—k the rich. They inherited their way to the top. Connections, luck, brown-nosing, and false confidence determine incomes more than "merit". The middle manager is no better than his underling. The applicant who got the job is no better than another applicant who was ignored. Guillotine the superfluous gentleman, the role will still be filled; the new girl may even do it better.
  3. Vilfredo Pareto. Hey—if the rich aren’t actively making the poor worse off, what does it matter?

The third view is the one I want to challenge just now.

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When I see a manual farmer being destroyed by Nature, I feel:

  • privileged
  • guilty
  • sorry for the farmer
  • the longer I spent thinking about their suffering, the sorrier I feel
  • Why doesn’t somebody do something? They don’t need much. They just need a little help.
  • This is so unfair.

And somehow, gut reactions are part of real morality and ethics.

 

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So here’s my challenge to the Paretians. Which image galls you more:

  1. a farmer suffering from drought, with the whole community destroyed—families crying into each other in solidarity as they all lost pretty much everything
    http://upload.wikimedia.org/wikipedia/commons/5/54/Lange-MigrantMother02.jpg
    , or…
  2. next to the damned farmers weeping on their knees, stands the Monopoly Man, laughing, swirling a flute of champagne and recounting the fable of the grasshopper and the ant.

http://newsimg.bbc.co.uk/media/images/45437000/jpg/_45437836_farmerindiaafpgetty466.jpg
http://rootsblog.typepad.com/.a/6a00d834520e4069e2010534c9b759970b-pi
http://www.jesus-is-savior.com/Reaching_The_World/homeless_man.jpg
http://i182.photobucket.com/albums/x119/xofferson/monopoly_man-13539.jpg

http://www.tehelka.com/wp-content/uploads/2014/03/img26.jpg
http://slwakes.files.wordpress.com/2011/01/4209433153_f9c6877925_o.jpg?w=295&h=300
http://www.thiscantbehappening.net/sites/default/files/images/Officer%20Deprimo.jpg

To the extent that these gut reactions translate into legitimate morals, the Robespierreans win over the Galtists and over the Paretians.

http://24.media.tumblr.com/tumblr_m90j5qEmAd1rb86ldo1_400.jpg

Envy exists. From this one infers that when the rich get richer but the poor don’t, that their individual utilities can still drop. But let’s go beyond society-as-a-collection-of-independent-individuals.

http://theeconomiccollapseblog.com/wp-content/uploads/2010/03/Rich-Getting-Richer.jpg

The image of the Monopoly Man merrily dancing next to the poor (or even indifferently ignoring their plight) curdles the blood. Gucci little piggies go first against the wall for a reason.

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Flash Boys is deliberately set up to suggest a “perfect world gone bad” scenario: As if, prior to the advent of HFT, … nobody ever got bad fills and liquidity was provided by a fairy godmother who never skimmed. It is … irresponsible, … dumb and deceptive, … to … talk about HFT without talking about what HFT replaced.

… Why … did floor traders and market makers play a key role in the function of markets for multiple centuries? Because floor traders provide liquidity. Liquidity provision is a service, and it has a cost. A discussion of what HFT replaced—with examination of new systems, old systems, and continuity between the two, with attendant pluses and minuses [would have been better]. Yet for Lewis it barely [merits] a paragraph.

Liquidity has always been an issue. The more size you want to move, the more of an issue it becomes. There has always been a need for middlemen to provide it, and friction / incentive issues in doing so, ever since the fabled meeting under the Buttonwood tree.

In the late 1980s, the Justice department busted 46 traders and brokers in the Chicago trading pits. The stealing had gotten so bad, the FBI came onto the trading floor.

Flash Boys reveals itself as a tempest in a teapot on pages 52 and 64. (I speak here of the hardcover edition from Amazon.) When Lewis … uses real numbers, the frivolity of his case is revealed.

On page 52 … an HFT “tax” that amounts to $160 million per day on $225 billion worth of volume. That is significantly less than one-tenth of one percent.

's review of { Flash Boys by Michael Lewis }




It’s much easier to destroy than to build. I can destroy not just one £30,000 car, but all the £30,000 cars in a car park, with a little planning and maybe a few hundred expenditure. And I could do a decent job of destroying a car with only £20.

image
Nothing in his pockets but knives and lint.

Same with houses—fire for example is a very effective tool per-effort for ruining lives. Four skinny pirates with a modicum of guns & ammo can hijack a vessel that cost $10 million or $100 million to build.

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File:Somali Pirates.jpg

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Despite it being so easy to destroy, where I live things are quite peaceful. Nobody slashes all the tyres in a car park, for example. Why? Economic theory says that when the cost of something goes down we’ll see more of it. Shouldn’t this be true as well for the destruction of other peoples’ lives & property?

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The Bechdel Test

Does a film contain

  • two named females
  • who talk to each other
  • about something other than a man?
 

This seemingly low bar for female inclusion fails for a surprisingly high fraction of media. Even some excellent films, like The Godfather, fail it.

The Godfather. Can you remember what the actual final shot of the film is? Some people are surprised that the POV is on Kay from inside Michael&#8217;s room - her anguished face is blocked out by the closing door. The preceding shot is her looking in as men greet the new godfather. Ultimately the final shot is saying we are with Michael now in that room, and he/we are part of the closing of the door. A great, symbolic final shot. The first of three perfect final shots in the series. A

(You could argue that female exclusion is a theme of The Godfather, but still wouldn’t it have been interesting to view some of the wives’ and daughters’ thoughts to each other about the boys’ mobster behaviour? This isn’t asking for the movie to be about women, just to feature their speech.)

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The Bechdel test is interesting mathematically because it is a global non-local test. Not every movie needs to pass for “things to be good” but if too many movies fail then things are not good.

Tribar

You could also view the Bechdel test as a vague or smudged boundary condition. Like in sensitivity analysis (in linear programming) where you nudge the boundary planes with a slack vector to see how the system responds. We could perturb the definition of the test, and as we change the criteria or interpretation more or fewer movies will pass. But the test makes its point whether we interpret it loosely or stringently, so we could consider it a suite of boundaries rather than a single, crisp boundary.

Individual playwrights can write whatever they want. Blue Lagoon with two boys? Be my guest. An all-white cast in a story set in rural Sweden circa 1320? Makes sense. Nju Bao (in 炮打双灯) isolated without female counsel in a man’s world? Appropriate. But when the Bechdel test fails en masse something insidious is going on. Which focus group told film investors that audiences hate seeing women talk to each other? Who went through all the scripts and changed all the female names to male ones? I’m guessing no-one.

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Sexism, racism, and so on are often discussed on a case-by-case basis. Was this or that action sexist|racist|etc on its own? But not every property can be observed at a zoomed-in level. Some properties are only visible at a systemic or macro level.

As a side note, the frequent failure of the Bechdel test also argues, via modus tollens, against a certain kind of “markets will fix things” logic. I would think that economic forces would incent film producers away from being so exclusionary. Aren’t Hollywood executives leaving massive amounts of money on the table by working so assiduously to make sure women are only faces, bodies, and tropes? But yet, count the number of movies that fail this basic inclusivity test. Even though movies are a $X billion industry (therefore locking in a few percent of audience is worth a lot in absolute terms and ∴ worth the time to look at), they still frequently exclude minority perspectives.

Here are some stories that fail the Bechdel test:

  • Bladerunner
    image
  • Red Firecracker Green Firecracker (炮打双灯)
  • Amélie
    image
  • The Graduate
    image
  • King of California
    image
  • The Last Emperor
  • The Godfather
  • The Quiet American [fails for women and for Vietnamese]
  • The Wrestler
    image
  • Dr Strangelove

and here are some that pass the Bechdel test:

  • Star Wars: Clone Wars (both)
    image
  • Firefly
  • Scream
  • Magnolia
    image
  • A Streetcar Named Desire
  • Kill Bill

(por femfreq.tumblr.com)




Jim Simons, a hedge fund manager, to the US Congress: “Most culpable [for the crisis of 2008], in my opinion, were the ratings agencies.”

  • "Our strategies are usually contrarian."
  • "Medallion Fund is almost entirely employee-owned."
  • "We charge ourselves fees."
  • 'In my view hedge funds were not a major contributor to the [crisis of 2008]. Generally [they] have increased liquidity and reduced volatility in the markets.”
  • "Each hedge fund’s leverage is controlled by its lenders."
  • He’s in favour of more financial regulation.

CSPAN via NYT




320 Plays

In other news, Art Laffer has become a parody of himself.

  • Deliberately misrepresenting the flat tax. Making it sound like 12% is a tax cut for most Americans, when in fact the effective tax rate for everyone making under $100k is already under 12%.
    The average effective tax rate on almost all Americans is already under 12%. 
  • If what you really want to do is raise taxes on the poor and cut taxes on the rich, why don’t you just come out and say it, Art?
  • Conflating simplicity of tax returns with elimination of tax brackets.
  • Poverty is caused by high tax rates and welfare. Quick, tell Somalia!
    Somalian GDP is $600 per person. Better tell them to stop paying out so much welfare because that is what's making them the #222 richest country. 
  • Brings up sin taxes as a distraction, like a magician’s trick.
    image 
  • No estimates of how much income is being “accelerated” from 2013 into 2012, only statements that the number is huge.
  • Of course when the tax rates rise on the rich, they’re all going to flee the US. Because ceteris paribus it’s in their interest to do so. All other things considered, the first thing I do every morning is ask what tax rates are on various activities I could engage in and various countries I could move to.
  • The sign is negative, therefore the magnitude is large.
  • Also austerity is equivalent to growth, although later on he contradicts that and says a lot of government spending is necessary. (Wonder whether he wants to cut health benefits, elderly benefits, military protection, or government jobs?)
  •  Some government spending is wasteful (again no discussion of magnitude—.00001% or 10%?) therefore austerity.
  • Ricardian Equivalence, because I say so.
  • Twisted reasoning like “Poor people are poor because of disincentives to work, but rich people would pay all of their tax if only you didn’t ask so much of them.” However not going to prove any of that, it’s just “common sense”.
  • This passes for argument: “Come on, you know that.” (I count four.)
  • Because, incentives. Because, markets.

If you laugh and squeal while you say it, you’re right.

 

I would love to have a less cynical view of the world than that any yahoo who claims taxes can be vastly reduced on the rich with no negative consequences to anyone gets banquets in his honour, funding from “think tanks”, and handed the reins of policy. But this sh*t tests me.

Searching for something positive to say…at least he said the goal of government is to get poor people to be prosperous.

(Source: BBC)




Some economics students from Lehigh University made the news a few weeks ago with their estimate that the raw materials (a quadrillion tons of steel) in the Death Star would cost £541,261,000,000,000,000 at today’s prices — a billion, billion dollars.

Of course this is shocking because the entire Earth’s economic output is only 1/13,000 that level. But that’s today. The problem with aggrandising this estimate is that these budding economists aren’t thinking on a truly galactic scale!


For example: remember the Star Forge? From the wookieepedia

The Star Forge drew energy and matter from a nearby star which, when combined with the power of the Force, was capable of creating an endless supply of ships, droids, and other war matériel.

Nobody has yet studied the economic benefits of Force Sensitivity, but we learn from canonical sources that the price of robots and ships must have dropped to what would today seem like zero around 30,000 BBY.

Just think about how nuclear fission energy was once called “Energy that’s not worth metreing”— and as a marker of our lack-of-progress compared to the Rakatan Infinite Empire, note that we have sent approximately 1 vessel to explore one path in our local star’s system, nothing like covering the volume of the galaxy.

Consider the Clone Wars, only 2 decades before the construction of the Death Star. The cost of the Clone Wars dwarfs the single-project Death Star, just as the total cost of WWII dwarfs the mere $45bn the US spent on Nimitz class aircraft carriers or paltry $50bn per stealth bomber a few decades later. Again from Wookieepedia, we learn that

What would ultimately become a Separatist army originally began as several immense forces comprised almost exclusively of droids.[1] When merged, these formed a colossal army numbering in the quintillions.[2]

If in fact they outnumber the clones by only 100 to 1, that would mean that there were tens of quadrillions of clones.

Both armies were spending an unimaginable amount of money. But hey, if you want to dominate 400 billion planetary systems, you need to play big.

There were approximately 400 billion stars, and around 180 billion of these had planets that could support life. Ten percent of those planets developed life, while sentient life developed in 1/1,000 of those (about 20 million). … there were 7.1 billion truly habitable stars, … 3.2 billion habitable star systems, with only 69 million systems meeting the requirements for Imperial representation, and 1.75 million planets considered full member worlds. In total, the galaxy was populated by approximately 100 quadrillion different life forms.

(The 100 quadrillion life-forms number is not cited and frankly I don’t believe it includes small stuff like lichens and bacteria. We have ~1 nonillion bacteria on Earth alone [American counting system], so there should be more like a quattuordecillion life-forms in 180 billion habitable planets.

You wonder why Yoda spends so much time meditating on the essential Force?)

We are talking about a war on a truly galactic scale here. Remember that Jedis are people who jump into hyperspace on a whim and travel from one star system to another in an Augenblick. (For reference, it would take us 50,000 years to reach Alpha Centauri with present technology.)

The entire Earth (like Alderaan) might be obliterated in the course of a skirmish and that would only be a minor tragedy because there are so many other battles (300 billion star systems in the Milky Way) to be fought.

Since their galaxy has 400 bn stars, the cost of the Death Star would only be $250 per planetary system. Come on, chip in, guys! This is going to be the Destroyer of Worlds!

 

Now we’re talking about the right spatial scale (a galaxy far, far away) but that’s only one source of the colossal difference between the Galactic Empire and us. The other is time scale (a long time ago—with an even longer time before that). 

Think about this: $1,000,000,000 trillion might sound like a lot now – but world GDP today stands at $62 trillion, which is only 14 doubling times away from being $1,000,000 trillion.

And by the Rule of 70, you can guesstimate how many years a doubling time takes. (thanks Editable Encyclopedia)



Let’s forget about the Hutt Empire and all of the space exploration that took place before the Galactic Republic—all of the journeys on the way to becoming a technologically mature society—and just talk about economic growth during the 25,000 years of the Galactic Republic

If US economic growth continued apace at 2% per annum for 25,000 years, then at the end the yearly value-added output would sum to $168 431 066 142 340 489 288 772 439 940 909 449 861 672 253 867 865 451 003 067 724 266 746 627 767 325 863 071 680 952 201 001 185 103 141 091 302 401 283 052 766 211 655 121 625 725 615 234 621 406 099 740 792 533 291 787 226 249 702 943 690 122 429 739 360 449 918 371 508 258 213 270 051 trillion. (A 225-digit number = ten septillion googol googol = one trevigintillion quinquagintillion = one quattuorseptuagintillion 2012 dollars.) Each year.

And again, this doesn’t count trade with “developing planets” (In Praise of Cheap Labour, meet the Orvax system!) or simply planets with different resources, cultures, and technologies. I’m just talking about an exogenous Solow constant of 1.02—very modest, I’m sure you’ll agree, when you look at growth rates in the poorer of Earth’s political factions.

And how long do you think it might take us to colonise not just nearby star systems, but to have republics and trade federations that stretch all the way across 120k × 1k light-years of the Milky Way?

If the Earth’s denizens grew the economy at 2%/year for 25,000 years (just from inception to conclusion of the Galactic Republic, none of the precursors) then the world GDP would reach $140 359 221 785 283 741 073 977 033 284 091 208 218 060 211 556 554 542 502 556 436 888 955 523 139 438 219 226 400 793 500 834 320 919 284 242 752 001 069 210 638 509 712 601 354 771 346 028 851 171 749 783 993 777 743 156 021 874 752 453 075 102 024 782 800 374 931 976 256 881 844 391 709.238 trillion!

And that’s not even counting the gains from galactic trade! Just intraplanetary growth.

These numbers may be too large to comprehend, so just think about this one. The GDP of Cambodia today stands at $32 bn or $2500 [PPP] per capita, less than a percent of the world’s output. Cambodia’s economic growth has jittered and started between 4.5% and 9% during the last couple decades. But let’s just assume 3% future growth to be conservative.

If Cambodia’s economy grew at 3% per year for only the amount of time that Yoda was a Jedi master (800 years) then Cambodia would be producing $955,724,857.68 trillion per year, in other words in very short order a few million life-forms occupying .12% of one planet’s land mass could buy a few Death Stars every year and still have enough money left over for food and beverage.

 

Again this is just a miniature of the changes in economics and warship financing we could expect to see as Earthlings expand their demand curves out into the galaxy over future millennia.

Back to the Wookieepedia, of course you remember the Banking Clan is on the Separatist side — how else to finance these quadrillion droids? The Separatists (and, following Episode III, the Galactic Empire) included some of the wealthiest players in the galaxy. So that’s another possible reason the Droid Army is feasible. (I can imagine how one wouldn’t join an insurrection without some serious money behind the defence effort—a nice bit of economic logic.)

This droid army drew upon of the battle droids of the Trade Federation[3], the Techno Union[4], the Commerce Guild[5], the InterGalactic Banking Clan[3], the Corporate Alliance[1], and other independent Separatist factions. These groups were subtly manipulated by Darth Sidious to expand their forces … Under his orders, these corporate giants began to purchase huge orders of battle droids from the millions of factories controlled by companies such as Baktoid Combat Automata, Colicoid Creation Nest, and Haor Chall Engineering over a decade before the start of the Clone Wars.[7] … Count Dooku deployed over a million B1 battle droids, one hundred thousand B2 super battle droids, and three thousand droidekas, plus many other types, at the Battle of Geonosis in 22 BBY…the Clone Wars had begun.[8]

(22 BBY is 22 years Before the Battle of Yavin, in which the Death Star was destroyed. Everything has a weak point. Many Bothans died to find out what it was.)
many Bothans died to bring you this Valentine. 

 

What I take away from the Star Wars allegory is that we had better spend an equal amount of research studying the political economy as we do on space exploration technology. After all, scientists don’t control how their technology is used—they merely generate power. (Just ask Oppenheimer.)

Let’s say we built a Star Forge and the price of robots dropped effectively to zero. Then we would be incredibly f*$#ed without an incentive structure that prevents even a sleuthy, sly, slick Sith Lord from destroying life on the colossal galactic scale.

Think about how security threats were multiplied by the invention of atomic weapons — the same will happen if we take care of science only, disregarding political economy.




So is it going to happen again? Another crippling financial maelstrom, I mean.
I guess we haven&#8217;t yet reached the period of complacency that was said would follow the &#8220;subprime crisis&#8221; or the &#8220;financial mess&#8221; or whatever you want to call it. People are still angry at bankers. But the news yaps less about finance than it did 1 or 2 years ago.
Anyway, the US stock market has been up and down&#8212;but more uppish for about two years now:
Chart of an index of the finance &amp; insurance industry, plus S&amp;P 500.
Everybody said during the heat of the crisis that &#8220;the real problem&#8221; was not necessarily this moment &#8212; but would depend upon vigilance enduring for years.
Well, have people forgotten about the bonuses? the leverage? the national debt? the foreclosed homes? the bailouts?
Part of me says no, but I do sense a waning in American anger.
Let me quote from the Amazon Preview of The Big Short, which is all I read:

What&#8217;s strange &#8230; is that pretty much all the people from both sides of the gamble left the table rich. &#8230; Wing Chau&#8217;s CDO business went bust, but he, too, left with millions of dollars &#8230; he had lost billions of dollars of other people&#8217;s money.  Howie Hubler lost more money than any trader in the history of Wall Street&#8212;and yet he [kept] the tens of millions of dollars he had made. The CEO&#8217;s of every major Wall Street firm were also on the wrong side of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.
What are the odds that people will make smart decisions if they don&#8217;t need to make smart decisions&#8212;if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they&#8217;re still all wrong.

So there you have it. EconTalk said all along that we should have let the baddies fail, eat the pain, and then it wouldn&#8217;t happen again. The news was talking about Goldman&#8217;s congressional hearings a few months ago. That seemed related to the incentive to rip one&#8217;s customers off. And there was definitely a furore. But that happened after the &#8216;87 crash too. And there was enough public interest in the LTCM disaster to justify books and articles. But still the incentives didn&#8217;t change. And according to Lewis&#8217; book, they still haven&#8217;t changed.
Other themes of the book:
partnerships bet with their own money; corporations bet with other people&#8217;s money
stock analysts are expected to lie or at least find a muted way to say &#8220;Your company sucks&#8221;

So is it going to happen again? Another crippling financial maelstrom, I mean.

I guess we haven’t yet reached the period of complacency that was said would follow the “subprime crisis” or the “financial mess” or whatever you want to call it. People are still angry at bankers. But the news yaps less about finance than it did 1 or 2 years ago.

Anyway, the US stock market has been up and down—but more uppish for about two years now:

Chart of an index of the finance & insurance industry, plus S&P 500.
Google's finance & insurance index
Google's finance & insurance index, year-on-year change

Everybody said during the heat of the crisis that “the real problem” was not necessarily this moment — but would depend upon vigilance enduring for years.

Well, have people forgotten about the bonuses? the leverage? the national debt? the foreclosed homes? the bailouts?

Part of me says no, but I do sense a waning in American anger.

Let me quote from the Amazon Preview of The Big Short, which is all I read:

What’s strange … is that pretty much all the people from both sides of the gamble left the table rich. … Wing Chau’s CDO business went bust, but he, too, left with millions of dollars … he had lost billions of dollars of other people’s money.  Howie Hubler lost more money than any trader in the history of Wall Street—and yet he [kept] the tens of millions of dollars he had made. The CEO’s of every major Wall Street firm were also on the wrong side of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.

What are the odds that people will make smart decisions if they don’t need to make smart decisions—if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they’re still all wrong.

So there you have it. EconTalk said all along that we should have let the baddies fail, eat the pain, and then it wouldn’t happen again. The news was talking about Goldman’s congressional hearings a few months ago. That seemed related to the incentive to rip one’s customers off. And there was definitely a furore. But that happened after the ‘87 crash too. And there was enough public interest in the LTCM disaster to justify books and articles. But still the incentives didn’t change. And according to Lewis’ book, they still haven’t changed.

Other themes of the book:

  • partnerships bet with their own money; corporations bet with other people’s money
  • stock analysts are expected to lie or at least find a muted way to say “Your company sucks”

hi-res